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Strategy Development - Coggle Diagram
Strategy Development
Acquisitions
Acquisitions activity tends to be cyclical within commercial markets, usually begin driven by the ups and downs of different economic cycles, aligned with the differing focus of governments
The perceived view being that often such strategic pathways are driven more in the interest of the people directly involved (directors, managers and advisers) than necessarily in the interests of the shareholders or wider stakeholder group
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Differing motives
Strategic motives
An extension of the customer potential in terms of georgraphy, products or markets
The consolidation of competitors within an industrial sector, this can reduce competition, enable the raising of prices to customers, increasing efficiency through the sharing of common resources and increase production efficiency
The combined capabilities of two organisations are likely to exceed and complement their individual potential
The development of new market opportunities may well arise from operating a larger organisation with greater financial strength and market coverage
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Financial motives
The alignment of assets and liabilities with different strengths and weaknesses into organisations can bring a greater combined financial strength. If a cash-rich company with a low tangible asset base is acquired by a company with high debt but also significant tangible assets, it should be apparent that the combination will produce a stronger balance sheet
Renewed balance sheet strength may prove a useful bargaining tool for the acquiring company in persuading the shareholders of of the acquisition target to sell their shares
Greater financial efficiency can often be achieved through a combined revenue stream with an overall reduced cost base although there may often be significant initial costs from an acquisition such as redundancies or reorganisation costs
The market value of a firm rapidly enlarged through acquisition is likely to exceed the previous two separate market values, presuming there is a market and shareholder acceptance of the financial benefits of the acquisition
Tax advantages may be derived by a profitable organisation acquiring a less profitable, or loss-making organisation. This can be particularly beneficial when acquiring a company with historic tax losses as these can generally be offset against the taxable profit of the acquiring company, depending on the tax rules of that jurisdiction
The opportunity for financial creativity In the structuring of acquisitions, within the remit of the law and of international financial standards, has led to the view that acquisitions can provide an interesting black hole opportunity for accountants to create reorganisation accruals. This can give the ability for a company to spread the financial benefits of acquisition over time and give an impression of gradual strategic success
The potential to acquire an organisation for one or more core activities with the opportunity to sell other activities or assets that are not required, this is often referred to as asset stripping
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Disadvantages
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Managerial mismatch, in terms of both ambition and levels of salary
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Johnson (2017) argues that there are four frequently occurring issues that will account for the success or failure of an acquisition
The addition of real or perceived value by the core stakeholders of the newly formed and enlarged organisation
The gaining of the commitment of middle managers who are responsible for the operational success within the organisation
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Due diligence
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The soundness and integrity of the reported financial results of the potential acquisition, including the judgements that have been made in the reported figures together with the market movements for a quoted company
The culture and ethos of the organisation including an understanding of the employee perception of the organisation
Any regulatory issues, unresolved complaints or impending litigation against the company being acquired
Strategic alliances
Formed when two or more organisations agree to share resources and activities in the pursuit of a common strategy
This is a popular method of strategic growth, enabling many of the benefits of the acquisition process but without the negative aspects of trying artificially to completely align all operational and cultural aspects of the organisations
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Johnson (2017) argues that the strategic drive for an alliance is likely to fall into one of two related but distinctive categories
A collective strategy requires a network of alliances to be built to compete against rival networks of alliances
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It is suggested that there are three main motives for the creation of a strategic alliance as the preferred strategic pathway
The rapid achievement of critical-mass scale within a marketplace, leading to cost reduction and an improved customer offering
The complementarity of differing capabilities within the members of an alliance, ensuring a more holistic business and enhanced market coverage
The learning potential from working closely with partners within an alliance without the need to change the underlying organisational structure or culture, although there will always be cultural implications for the people directly involved in the alliance
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Advantages
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The speed of access to market - an effective alliance can develop its offering rapidly and often without unnecessary bureaucratic delay, giving it competitive advantage
Reduced political and legal complications through working within a structure that does not require external authority approval
Disadvanatges
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The risk of potential repetitional damage through seeing to be associated with other non-alliance activities of a partner to the alliance
Confusion among middle managers, or even directors, as to who they actually work for and who they report to, if they have two reporting lines defining which reporting line takes priority in which circumstances
Erosion of capabilities and competencies creating a situation where in house abilities are diminished with a reliance on the strategic partner
Organic development
Built around a strategic plan to grow a business through a strategic pathway of building upon and developing the existing capabilities of an organisation
Most risk averse of the three core strategic pathways although it may take time to fully realise the strategic potential and objectives
An organisation following this approach will be in control of its own destiny (as far as it can feasibly be),
Advantages
Dealing with the known
The current capabilities of the organisation can be maximised and people involved in the process can be developed.
There is more likely to be a united vision and a desire to achieve mutually agreed strategic objectives.
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Staggered investment
Capital investment costs can be controlled across the period of development and usually there can be a minimal initial cost required through using current excess capacity
This allows the organisation to test the marketplace with a minimum risk to its financial viability (and to maintain or build its reputation)
Minimised disruption
The operational supply chain of the organisation can continue with minimal interruption to ensure continuity and continued revenue streams
Self-reliance
Because organic growth relies upon the organisation itself, other than the need for an acceptable and suitable supply base there can minimal reliance upon the particular skills and availability of any other organisation
Strategy focus
The core strategic drivers of the organisation, vision, mission, objectives and goals can remain focused in line with the desires and expectations of the stakeholders of the organisation
The involvement of another organisation would be likely to require at least some variation in strategic vision and therefore strategic implementation
Culture maintenace
It will be apparent that organic development will allow growth and new activities within the existing cultural environment
Cultural change or culture alignment between two different organisations can be time consuming and lead to a reduction in the core strategic focus